A Case of Private Supply of Money in Stateless Somalia

Jamil A. Mubarak

Journal of African Economies, 2002, vol. 11, issue 3, 309-325

Abstract: Since the collapse of the state in 1991 and the subsequent crash of the domestic currency, the Somali economy starved for liquidity to facilitate economic recovery and means to replace ageing banknotes. In the long absence of effective state authority, forged banknotes from factions competed to fill the void and became accepted. In much the way that Milton Friedman predicted, the consequent unregulated private supply of money seeking to capture seignoirage income soon raised prices, destabilised domestic markets, eroded the market value of Somali shilling banknotes and reduced it to pure commodity money. However, the experience did not lead to an infinite price level simply because the money issuers were unwilling to add zeros to denominations in fear that the public will not accept them. Rather, as the marginal cost of importing and injecting new reprints on existing highest denomination neared its exchange value, the incentive to import more banknotes subsided, and domestic prices started to stabilise. Incredibly, at this very low exchange value, the Somali currency survives and retains its service value, and real cash balances have actually increased. Copyright 2002, Oxford University Press.

Date: 2002
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